The assertions being made from the ISPI data are lightweight and counter-intuitive according to Paul McNamara
Courtesy of IPD, we are told that sustainable properties underperform more conventional property in investment terms. Phew! That's alright then, we can all go back to sleep and forget about all this green malarkey - can't we? After all, we have fiduciary responsibilities and, as such, we can't be messing around with things that don't pay. So we can forget about sustainability now - can't we?
I regret to inform all of those gullible or desperate enough to hang on to such findings as an excuse to avoid thinking about ‘green issues' that we most certainly cannot yet give up thinking about sustainability. Rather, it is the converse. Sustainability and the role property needs to play in it will only become more important in the months and years ahead.
So, what's the beef? The ‘green properties' in the IPD/IPF Sustainable Property Index (ISPI) are flagged as properties that meet certain green criteria. Once identified, they are treated as a ‘meta-portfolio' within the IPD Index and their collective performance is compared with the rest of the index.
However, anyone who knows anything about property appreciates that there are a myriad factors that determine asset and portfolio performance.
The corollary of this is that, in order to distil the effects of ‘green-ness' on asset performance, a very substantial amount of data and statistical work is needed to ‘neutralise' the effects of all the other performance drivers. IPD has not done this with ISPI and with a paltry three years' worth of data on such a few new number of properties, they could not hope to.
This means that, in the analysis presented, there are no controls for the sector, geographic, lease length, ‘primeness-secondariness' compositions of the two sets of data. This means that much of the differential between the ‘green' sub-portfolio and the wider index could be driven by many things other than the ‘greenness' of the assets. Until this is done, there is nothing in ISPI to convince us that the observed underperformance of this ‘green' sub-set of assets is driven by the ‘green-ness' of the assets in it.
Furthermore, there is still a general feeling among British valuers that ‘green issues' are only now beginning to assert themselves on investor and tenant behaviours and, thereby into valuations, asset performance and indices. There is no reason to expect that an issue not actively being considered and acted on in recent years would have had a major determining factor in asset performance over that time.
As such, we should see ISPI as merely a sub-sample like any other of the IPD index. It has the same potential for differential performance (a tracking error) as any other such sub-sample. We could find similar differential performance in sub-samples based on assets having red front doors or coming from towns beginning with the letter ‘N'. These weren't major factors in the market in recent years either.
For those wanting to judge this issue more seriously, far better they look at the much more exhaustive and thorough research coming from the US where sufficient data and (notwithstanding a modicum of academic dispute) proper analysis has facilitated some real insight into the data on the effects of ‘green-ness'. The results may differ from study to study but the general thrust is one of ‘green' properties beginning now to attract higher rents, fuller occupancy rates and lower yields than their ‘brown' counterparts.
Perhaps the greatest shock from the assertions being made from the ISPI data is how counter-intuitive they are. Sustainability has clearly weathered the recent economic and property market episodes and is, without question, continuing to rise up corporate, personal and political agendas. It represents a new standard that property assets will need to live up to and, as such, looks set to become a new dimension to the operation of the market. If you believe that tenants will increasingly prefer ‘green' over ‘brown', then ultimately such assets will command higher rents.
By the same token, they should let more quickly, making them less risky and more valued. Similarly, if you believe investors prefer to own green rather than brown assets, then green properties will prove more liquid and, as a result, higher valued.
So, don't be fooled by cheap headlines on this lightweight piece of analysis. Sustainability will assuredly continue to impose itself on our market in the years ahead and, as politicians push harder to make a lagging property industry play its part in the necessary fight against carbon emissions, this will only become more so. If you are thinking of switching off - make sure it's the light bulb in the office and not in your head.